What Is Accounting? Accounting is often characterized as «the language of business.». Accounting plays a very important role in our economic and social system.
Because of the wide range of accounting activity, there is no concise description of accounting. Accounting is concerned with recording, sorting, and summarizing data related to business transactions and events. Accounting is also concerned with reporting and interpreting the data. Accounting has been defined broadly as the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.
Accounting is a service activity. Its function is to provide quantitative information about economic entities. The information, essentially financial in nature, is primarily provided by reports referred to as financial statements and is intended to be useful in making economic decisions. These reports are used in describing the activities and financial status of many different kinds of economic entities. They include hospitals, schools, cities, governmental agencies, and profit-oriented businesses.
The objective of financial statements is to communicate information that is useful to investors, creditors and other users in making resource allocation decisions and/or assessing management stewardship. Financial statements provide information about:
(a) an entity's economic resources, obligations and equity;
(b) changes in an entity's economic resources, obligations and equity;
(c) the economic performance of the entity.
In making decisions about an economic entity, individuals generally must begin by asking questions about the entity. The answers to many such questions are found in accounting reports. If, for example, the entity is a business, the managers of the business would look to accounting for answers to questions such as:
What are the resources of the business?
What debts does it owe?
Does it have earnings?
Are expenses too large in relation to sales?
Is too little or too much merchandise being kept?
Are amounts owed by customers being collected rapidly?
Will the business be able to pay its debts as they mature?
Should the plant be expanded?
Should a new product be introduced?
Should selling prices be increased?
In addition, grantors of credit such as banks, wholesale houses, and manufacturers use accounting information in answering such questions as:
Are the customer's earning prospects good?
What is its debt-paying ability?
Has it paid its debts promptly in the past?
Should it be granted additional credit?
Likewise, governmental units use accounting information in regulating businesses and collecting taxes. Labor unions use it in negotiating working conditions and wage agreements. And last but certainly not least among the users of accounting information are individual investors, who make wide use of accounting data in their investment decisions.
Accounting and Bookkeeping
Many people confuse accounting and bookkeeping and look on them as one and the same. Actually, bookkeeping is only part of accounting. To keep books is to record transactions, and a bookkeeper is one who records transactions either on a computer or manually or with a bookkeeping machine. Accounting includes much more than this. The accountant should have the ability to design the accounting system; to analyze and record complex, nonroutine transactions; and to analyze and interpret accounting information.
Accounting and Computers
Computers are used for many tasks in our modem society, including the processing of accounting data. A computer can accept and store accounting data, sort and rearrange it, perform arithmetic calculations on it, and prepare reports from the data. Furthermore, a computer can perform these functions very rapidly and with little or no human intervention. However, before a computer can do this, a set of detailed instructions must be prepared and entered into the computer to tell it how to process the data. The person who prepares these instructions must have a thorough understanding of accounting procedures and accounting principles. Thus, while computers have had a tremendous impact on accounting, they are not substitutes for understanding the fundamental concepts and principles of accounting.
FOUNDATIONS OF ACCOUNTING
Accounting contains elements both of science and art. The important thing is that it is not merely a collection of arithmetical techniques but a set of complex processes depending on and
prepared for people. The human aspect, which many people, especially accountants, forget, arises because:
1. Most accounting reports of any significance depend, to a greater or lesser extent, on people's opinions and estimates.
2. Accounting reports are prepared in order to help people make decisions.
3. Accounting reports are based on activities which have been carried out by people.
It is very difficult to find a pithy definition that, is, all-inclusive but we can say that accounting is concerned' with.
The provision of information in financial terms that will help in decisions concerning resource allocation, and the preparation of reports in financial terms describing the effects of past
resource allocation decisions.
Examples of resource allocation decisions are:
Should an investor buy or sell shares?
Should a bank manager lend money to a firm?How much tax should a company pay?
Which collective farm should get the extra tractor? 20
Accounting is needed in any society requiring resource allocation and its usefulness is not confined to 'capitalist' or 'mixed' economies.
An accountant is concerned with the provision and interpretation of financial information. Many accountants do of course get directly involved in decision-making but when they do they are performing a different function.
Accounting is also concerned with reporting on the effects of past decisions. We contend that knowledge of the past is, relevant only if it can be used to help in making current and future decisions, for we can hope that we shall be able to influence the future by making appropriate decisions but we cannot redo the past. Thus the measurement of past results is a subsidiary role, but because of the historical development of accounting and, perhaps, because of the limitations of the present state of the art, 'backward looking' accounting sometimes appears to be an end in itself and not as a means that will help in achieving a more fundamental objective.
